AutoZone, Inc. — FY2010 Form 10-K
Reporting period: Fiscal year ended August 28, 2010 (52 weeks); fiscal 2009 was also 52 weeks. The filing includes fourth-quarter results for a 16-week period. AutoZone operates automotive parts retail and commercial distribution businesses, with ALLDATA and e-commerce activities; it does not provide vehicle repair or installation services.
Financial performance
| Metric | FY2010 | FY2009 |
|---|---|---|
| Net sales | $7.363 billion | $6.817 billion |
| Gross profit / margin | $3.712 billion / 50.4% | $3.416 billion / 50.1% |
| Operating profit / margin | $1.319 billion / 17.9% | $1.176 billion / 17.3% |
| Net income | $738.3 million | $657.0 million |
| Diluted EPS | $14.97 | $11.73 |
| Cash from operations | $1.196 billion | $923.8 million |
| Capital expenditures | $315.4 million | $272.2 million |
| Debt | $2.908 billion | $2.727 billion |
- Annual sales increased 8.0%; domestic comparable-store sales rose 5.4%. Domestic retail sales increased 6.9%, and domestic commercial sales increased 13.8%.
- Gross margin improved 0.3 percentage points, mainly from distribution-cost leverage and operating efficiencies. SG&A declined to 32.5% of sales from 32.9%.
- Net income rose 12.4%; diluted EPS rose 27.6%. Repurchases contributed approximately $0.74 to FY2010 diluted EPS.
- Fourth-quarter sales were $2.445 billion versus $2.232 billion, net income was $268.9 million versus $236.1 million, and diluted EPS was $5.66 versus $4.43. The quarters were each 16 weeks.
- Operating cash flow less capital expenditures was approximately $880.9 million. Cash flow benefited from higher earnings and increased accounts payable; the accounts-payable-to-inventory ratio rose to 106% from 96%.
Liquidity, debt, and capital allocation
- Year-end cash was $98.3 million; current assets were $2.612 billion and current liabilities $3.064 billion, resulting in a $452.1 million working-capital deficit.
- Debt totaled $2.908 billion, including $433 million of commercial paper and $26.2 million of short-term borrowings. The company reported $331.1 million of available capacity under its $800 million revolving facility, which expires in July 2012.
- Management reported 4.27x interest coverage and adjusted debt to EBITDAR of 2.4x; the company was in compliance with debt covenants. It stated that it had the ability and intent to refinance near-term maturities classified as long-term.
- Operating, investing, and financing cash flows were $1.196 billion, negative $307.4 million, and negative $883.5 million, respectively. The company repurchased $1.124 billion of stock and paid no common dividend.
- Stockholders’ deficit was $738.8 million, reflecting the cumulative effect of substantial share repurchases. FY2010 ROIC was 27.6%, up from 24.4%.
Changes, outlook, and risks
- AutoZone ended the year with 4,627 stores, including 238 in Mexico, after 213 openings and three closures. Management attributed demand strength partly to consumers keeping older vehicles longer amid recession, credit constraints, and unemployment; it cautioned that the duration and impact of these trends were uncertain.
- Management expected FY2011 investment to be consistent with historical rates, primarily for new stores, existing-store improvements, and infrastructure. No specific revenue, earnings, or comparable-sales guidance was provided.
- Key risks include economic weakness and changes in vehicle age or miles driven, competition and pricing pressure, commercial-customer growth, access to credit and investment-grade ratings, vendor supply and product quality, hiring and retention, store-opening execution, supply-chain disruption, systems outages, fuel and foreign-exchange exposure, and potentially higher employee healthcare costs.
- Contractual commitments included $2.882 billion of long-term debt principal, $1.740 billion of operating lease payments, and $617.2 million of scheduled interest. The pension liability was $211.5 million against plan assets of $117.2 million; uncertain tax positions including interest and penalties totaled $46.5 million.
- In the Robinson-Patman Act litigation, the court dismissed claims against AutoZone in September 2010, but four plaintiffs filed a further amended complaint in October. AutoZone disputed the claims and could not estimate a loss or range of loss.
- ESL Investments and affiliates beneficially owned approximately 34.7% of outstanding shares as of October 18, 2010, giving them potential substantial influence over shareholder actions. Management reported effective internal controls, and the auditor issued unqualified opinions on the financial statements and internal controls.
Investor verification priorities
- Confirm sustainability of comparable-sales growth and the relative contributions of transaction counts, ticket size, inflation, and new stores.
- Assess cash generation against continued store investment, repurchases, debt maturities, the working-capital deficit, and reliance on vendor payment terms.
- Review leverage, refinancing plans and capacity, credit ratings, and sensitivity to higher interest rates.
- Track commercial-sales profitability, hub-store investment, and execution of planned openings and infrastructure spending.
- Check subsequent developments in the litigation and resolution of uncertain tax positions, pension funding, and other material contingencies.